Prorations are the adjustment of property taxes between the buyer and seller at the time of closing, ensuring that both each are responsible for their fair share of the property taxes. Prorations are based on the number of days each owns the property during the tax year and appear as a separate line item on the settlement statement.
If a tax bill is already out, then its proration will be based on the actual amount owed and will be shown as a credit from the buyer to the seller. Essentially the seller is paying the property tax for the entire year and the buyer is crediting their portion to the seller.
If a tax bill is not out, then the proration will be based on an estimated tax amount. Typically that’s just the previous year’s amount. Then there’s a credit from the seller to the buyer for their portion. When the tax bill finally does come out, the buyer is responsible for the full bill.
Overall, tax prorations are a beneficial aspect of real estate transactions that help to ensure fairness, clarity, and simplicity for both the buyer and the seller.